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Saturday, August 18, 2007

The NHL as a financial haven?

Somebody call Jim Cramer over at Mad Money and see what he thinks, will he give it a boo yah or just a boo!

But for the moment it seems that buying an NHL franchise is the in thing to do.

It's hard to figure out how a league with little television exposure in the United States and suffering some box office slowdowns in the southern territories can suddenly be the hot financial item, but in the space of a couple of months NHL franchises have become in demand items.

Edmonton turns down a billionaire and his exotic offer of hundreds of millions of dollars to buy the hometown Oilers and Jim Balsillie still wants to spend some of his personal fortune on an NHL dream for Hamilton, if only Gary Bettman would let him.

In a month where the stock market has skyrocketed and plummeted all in one week, there still is apparently a will to buy up hockey teams in far off places and try to make a go of it.

All of which should be good news for Gary Bettman who somehow has managed to have his stable of franchises almost double in value, all the while going by almost completely un-noticed by the major media outlets of the US.

Some might say this is astute business accumen or others might suggest that it's a bubble economy of NHL franchises that may leave their new owners holding their bank accounts a little closer to their vest in the future.

The Nashville Predators and Tampa Bay Lightning have been around for a combined total of 22 NHL seasons.

And in all but one of those, they've lost money — the lone exception being Tampa's Stanley Cup winning season of 2004.

Yet it appears both teams may soon change hands with price tags in the neighbourhood of $200-million dollars (all figures U.S.). Those deals include some added value through such things as real estate, public concessions and arena entertainment rights, but there's no getting past the fact NHL franchise values have soared since the end of the 2004-05 lockout.Just ask Edmonton pharmacy tycoon Daryl Katz who was rebuffed in his $185-million offer to buy the Edmonton Oilers last week.

Said one banker who has completed several NHL franchise transactions: "It boggles the mind that the smallest market in the NHL just turned down such a huge price."

So what's pushing values so high despite the NHL's apparent downward trend in popularity in the United States and the fact that salary expenditures this coming season are equal those of the final season before the lockout?

The answer seems to be that, while NHL teams remain money-losing ventures in many cities, investors are attracted to businesses where they can at least project what those losses will be.In other words, "cost certainty" — the buzz term of the 2004-05 lockout — apparently has a lot of value to both to those looking to buy into hockey as well as those cashing out.

"The league was highly volatile and [the owners] proved the lesson that the pressure to win on the ice or on the field can drive the business into very significant losses," said Randy Vataha, president of Game Plan LLC, a Boston-based company that brokers the sale of sports franchises.

"What the salary cap does is give you a chance to be successful on the ice and to be financially successful. It doesn't make [market] disparities go away. But at least now in a place like Nashville, if you can get your average ticket sales and price close to the average of the league, then you have a chance of having a business that works.

"There's no perfect world, but it's all based on cost certainty. Now that you have that, the franchise values have doubled from what they were before the lockout."

This despite the fact a good number of NHL teams will spend more on salaries this season than they did in the year preceding the lockout, without any significant new revenue stream. In fact, the most significant revenue growth for the NHL since the lockout may be the rise in the Canadian dollar, which has greatly enhanced the standing of Canadian teams while pushing the salary cap higher.

While investors apparently see the NHL's current economic model as a stable foundation for long-term growth, Vataha cautions it alone doesn't turn weak hockey markets into strong ones."One of the dangers of a cap [as a percentage of overall revenue] is that it doesn't always solve your problems," he said. "If 20 teams raise their revenues and 10 don't, then those 20 teams will be pulling the cap up. It's up to you and your market to stay up with the trend, but the thing can't spin out of control like in the past."

The biggest gamble by new NHL investors is whether or not hockey can regain more of a profile in the United States, which, among other things, might help it attract more lucrative television contracts.

While hockey was perceived to be on its way up the hierarchy of professional sports in the United States a decade ago, it's become less prominent in part by moving its cable position from ESPN to Versus.

"The current [television] situation is not good, but it really can't get any worse," said Chuck Greenberg, a Pittsburgh attorney who has been involved in deals involving Mario Lemieux with the Penguins and Bernie Kosar with the Florida Panthers. "I think there's an upside in terms of a television agreement."

That sense of buying in at a low is another ingredient that seems to be fuelling interest."Hockey was the first sport ever to cancel an entire season," Vataha said. "I think everybody knew what a severe and drastic measure that was. And the consequences of that will have a fairly significant time frame as the league regains its footing. That's what a lot of buyers see right now: The numbers are down, but we didn't play for a year. It was right out of sight.

"I think a lot of people buying franchises believe the owners have built a foundation and now it's up to them to build on it. And now is the time to purchase a team because if they do rebuild it, franchise values are going to be $400-million."

Another factor that may be driving franchise value is good old supply and demand. From 1991 to 2001, there were 18 expansion franchises hatched in the four major-league sports: an average of almost two a year. Since then, however, only the NFL's Houston Texans and NBA's Charlotte Bobcats have been added. And, right now, hockey is a veritable bargain compared to baseball, basketball and football, where the top NFL franchise values are approaching a billion dollars.

"The number of pro sports franchises [in North America] is not getting bigger, but the number of people who can afford them is," Greenberg said. "It's supply and demand and that's helped raise franchise values in the NHL."

Is it possible NHL franchise value escalation may be partly due to teams exaggerating losses going into the lockout in order to gain leverage against the players? Apparently not."We look at a lot of numbers from a lot of teams and we have not found people exaggerating losses," Vataha said.